McKinsey Mapping the Value of the Internet of Things: Study Summary

Jonathan Rubin

McKinsey’s Latest Take on the Internet of Things

The Internet of Things (IoT) – “digitizing the physical world” – has generated buzz from industry and consumers alike, excited about the potential impact of IoT technology and has been a key area of focus for the Westbury Group. Reliable forecasts have been rare, so we were pleased to review the recently published report by the McKinsey Global Institute (MGI), “The Internet of Things: Mapping the Value Beyond the Hype,” in which MGI identifies how the IoT industry will evolve and generate value.

MGI predicts the potential economic value of IoT across nine diverse settings will range between $3.9 trillion and $11.1 trillion by 2025. The higher estimate pegs the IoT industry at approximately 11% of the world economy based on a World Bank estimate of global GDP in 2025, though it is a best-case scenario. More realistically, the effect will fall in the middle of the range and slowly increase as technology is optimized to harness the data provided by IoT.

Nine Key Areas of Economic Impact

MGI identifies nine settings in which IoT can have the greatest potential impact.

IoT-will create value in factories with the optimization of resources such as equipment and inventory. IoT could save 10%-20% in energy and improve labor efficiency by 10%-25%. In total, IoT could generate as much as $3.7 trillion per year in economic value within factories.

So-called “smart cities” could become a reality with improved IoT technology. Given that cities are the center of economic growth going forward, the impact of IoT in urban settings may be especially notable. By advancing “transportation, public safety and health, resource management, and service delivery,” IoT could add as much as $1.6 trillion annually in economic value to cities by 2025.

For humans, IoT technology will improve understanding of human health, diseases, and productivity. This increased value of human capital could reach $1.6 trillion annually by 2025.

The impact of IoT on the automotive industry is especially exciting with the advent of autonomous driving for consumers. However, IoT will also affect the performance of other modes of transportation, including planes and trains. MGI’s bull case estimates IoT will affect vehicles by $740 billion per year.

Conducive Conditions

There are certain conditions under which IoT will have the largest positive effect on the global economy in the future.

Interoperability is crucial. MGI posits that multiple IoT systems working in conjunction unlocks as much as 40% of the total potential value of the technology.

The level of protection for collected data will also affect the adoption of IoT, as data becomes increasingly transparent.

Clarification of intellectual property with respect to data is imperative going forward, for example, ownership of the data generated by an implanted medical device.

The integration of IoT technologies into the everyday decision-making of firms will force a closer relationship between IT and the rest of the organization.

Finally, regulation will play a role in the implementation of IoT in the future. Autonomous driving is just one of the many areas in need of public policy action for the disruptive technology.

Other Dynamics in the Growth of IoT

Most data collected by IoT instruments is not used. The report cites the example of an offshore oilrig that uses “less than 1 percent of the data being generated by the 30,000 sensors…to make decisions.” If customers can crunch more IoT data, they can unlock significant value.

IoT could have an equally large impact on developing economies as on advanced economies. Paradoxically, the lack of technological infrastructure in developing economies means that IoT may have a greater number of applications right away. MGI’s estimates show that 62 percent of the additional value created by IoT will occur in advanced economies, with the remaining 38 percent advancing developing economies.

B2B applications of IoT technology will have greater economic impact than consumer applications. While consumer IoT technologies have generated more headlines, B2B applications have greater potential.

Customers will receive 90% of the value generated by IoT technologies. MGI forecasts that firms in the services and software segment of the “tech” industry will benefit more than hardware producers from IoT.

IoT will force both users and suppliers to change their business models. For users, MGI cites the example of an industrial manufacturer of equipment. IoT-collected data will help user companies understand how much customers use each machine, which would allow the manufacturer to adjust to a usage-based pricing model. For suppliers, MGI foresees competitors developing broadly scaled applications of IoT technologies.

Lastly, while targeted, vertical IoT solutions are most popular now, MGI predicts more that horizontal platforms may emerge as the industry changes. For example, in the home, instead of separate solutions for security, entertainment, lighting and energy, providers may offer an integrated solution that encompasses the entire range of functions.

Westbury welcomes inquiries by companies who want to take advantage of the excitement surrounding IoT to raise capital or explore potential corporate sales or acquisitions.